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Temporary Tax

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Regulation NAC-DGERCGC 20-00000004 issued by the Internal Revenue Service and published on January 29, 2020 in the Supplement of the Official Registry 131 establishes the procedure for filing the tax return and paying the temporary tax.

The Regulation establishes that the temporary tax that must be paid on an annual basis on the fiscal years 2020, 2021 and 2022.

The taxable base is equal to the income obtained on the fiscal year 2018 -as registered in the income tax return or as established by the Tax Administration within an assessment procedure- less the exempt income and income not subject to income tax. To this amount the taxpayer should add or deduct, as appropriate, the adjustments for deferred taxes registered in the same fiscal year.

The following rates must be applied to the taxable base:

Taxable income from 

Taxable income until

Tax rate US$1.000.000,00 US$5.000.000,00 0,10% US$5.000.001,00 US$10.000.000,00 0,15% US$10.000.001,00 Forward 0,20%

The value of annual each contribution cannot exceed 25% of the income tax generated in the fiscal year 2018.

Those taxpayers who did not generate income tax in the fiscal year 2018 are not required to file and pay the temporary tax return. The advanced income tax shall not be considered if the amount was higher than the income tax generated.

If the amount of the taxable income or the amount of the income tax declared in the income tax return filed for the fiscal year 2018 changes, a substitute tax return must be submitted.

If the entity is liquidated before the date on which the temporary tax return must be filed, the tax must be paid in advance with respect to the fiscal year in which the liquidation takes place. Entities liquidated until December 31, 2019 are not required to pay the temporary tax.

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Law for Simplification and Progressivity of the Tax Regime

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Below we will analyse the Law for Simplification and Progressivity of the Tax Regime published on December 31, 2019 in the Supplement of the Official Registry 111, amended the Internal Tax Regime Law.

Dividends:

Dividends distributed to individuals with tax residence in Ecuador and entities and individuals located abroad are subject to income tax. Only dividends distributed to entities with tax residence in Ecuador or permanent establishments located in Ecuador are exempted from income tax.

The taxable income is equal to 40% of the dividend effectively distributed. The concept of global dividend is eliminated (dividend distributed plus taxes paid by the company) and consequently the tax credit for taxes paid by the company.

Dividends distributed to individuals with tax residence in Ecuador are subject to up to 25% withholding. The Tax Authority will issue a regulation establishing the withholding percentage applicable, according to the amount of the dividend.

Dividends distributed to entities and individuals residing abroad will be subject to 25% withholding tax. However, if the Ecuadorian entity that distributes the dividends fails to report its corporate structure, the withholding percentage applicable to the dividend paid abroad will be 35%.

It is ratified that the capital increase with retained earnings (stock dividend) will not be taxed.

Interest Expense:

In the case of interest paid by banks, insurance companies and entities of the financial sector of the Popular and Solidarity Economy:

Interest that exceeds the interest rate established by the Monetary and Financial Policy and Regulation Board will not be deductible.

The total amount of the loans granted abroad -directly or indirectly- by related parties, may not be greater than 300% of the entity equity. Interest paid or accrued with respect to credits that exceed this percentage will not be deductible.

In the case of interest paid by entities or individuals, the total amount of the net interest paid on loans granted by related parties must not exceed 20% of the entity´s profit before labor participation, plus interest, depreciation and amortization corresponding to the respective fiscal year. Interest paid or accrued that exceed this percentage will not be deductible.

Creation a temporary tax to be paid:

  • How much should be paid? 

Entities that perform economic activities and whose taxable income in fiscal year 2018 are equal to or exceeded one million dollars.

  • How much should be paid?

The amount to be paid must be calculated according to the following chart:

Gross taxable income
from (US$) 

Gross taxable income up
to (US$)

Rate 1.000.000 5.000.000 0,10% 5.000.001 10.000.000 0,15% 10.000.001 Onwards 0,20%

The amount of the tax shall not exceed 25% of the income tax generated in the fiscal year 2018.

  • When should the tax be paid?
When should the tax be paid? The tax shall be paid annually during the fiscal years 2020, 2021 and 2022, until March 31st of each year. Failure to submit the tax form within the deadline will be sanctioned with a fine equal to US$1,500.00 for each month or fraction of a month. The fine will not exceed 100% of the contribution.

Important reforms

  • VAT on digital services:

Digital services are subject to 12% VAT. The taxable event occurs when: In the case of import of digital services, the taxable event occurs when the importer of the service -an entity or permanent establishment located in Ecuador- pays the service provider. In the case of delivery of goods, the taxable event occurs when the importer pays for the delivery services of such goods. The VAT will be applicable over the amount of such delivery services.

The VAT on digital services will be applicable starting July 2020.

Web domain services, hosting and cloud computing services are subject to 0% VAT.

  • Foreign Exchange Control Tax:

The exemptions of foreign exchange control tax were amended as follows:

  1. Investments from abroad made in the Ecuador stock market. These investments may be made in equity securities or in fixed income securities.
  2. Dividends: Dividends paid to entities or individuals residing in tax havens is exempted. This exemption is not applicable if the dividends are distributed to foreign entities which shareholder –directly or indirectly- are individuals or entities with tax residence in Ecuador which are shareholders of the entity that distributed the dividend.
  3. Payments made abroad for financial returns, and capital gains derived form:
    • Investments from abroad made in the Ecuador stock market. These investments may be made in equity securities or in fixed income securities.
    • Securities issued by entities domiciled in Ecuador, that were acquired abroad, destined to finance housing, microcredit or productive investments.
    • Fixed-term deposits or investments made with resources from abroad in local financial institutions.

This exemption does not apply if the payment is made between related parties.

CORRALROSALES

The use of cannabis has been approved in Ecuador

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In the 1st Supplement of the Official Gazette No. 107 of December 24, 2019, the Reform of the Criminal Law was published, which will enter into force in June 21, 2020.

Included among the reforms, is the decriminalization of possession of drugs that contain cannabis or derivatives as their active ingredient for therapeutic, palliative or medicinal ends, or for the practice of alternative medicine. In addition, the Law of  Control and  Prevention of the use of  Drugs   has been amended, excluding non-psychoactive or hemp cannabis from control, extended to the cannabis plant or any part of the plant, whose delta-9-tetrahydrocannabinol (THC) content is less than 1%.

The Ministry of Agriculture will have 120 days from the entry into force of this law to issue the regulations to control the import, planting, cultivation, harvest, sale, industrialization and exportation of industrial hemp. Furthermore, shortly the National Assembly must approve the Health Law, in which cannabis and its derivatives for medicinal and therapeutic use will be regulated.

CORRALROSALES

Revista Ekos – Between lawyer and woman: María Cecilia Romoleroux

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DETAILS

DATE: 3-01-2020

CORRALROSALES IN THE NEWS: 

-María Cecilia Romoleroux

MEDIA: Revista Ekos

María Cecilia Romoleroux is a career lawyer and has excelled in various fields at a national and international level. Her passion for the law has allowed her to be a pioneer in areas where women were not easily accepted.

Her career is marked by gender inequality, but this was not an impediment to being the first Ecuadorian woman to be part of the board of directors of the International Trademark Association (INTA) or of the Programming Committee of the International Association for Protection of Intellectual Property (AIPPI).

In an interview with Ekos Magazine, María Cecilia shared her experiences on the empowerment of women and the work that must be done in Ecuador to achieve gender parity. Her history began in the classrooms of the Pontifical Catholic University of Ecuador where only a small group of women could complete their studies, one by one they started to drop out due to various circumstances.

“For two years I worked in a free clinic for abused women. A situation that humanizes you and allows you to understand the need to empower women”, said Maria Cecilia, who stressed that no person should be an “appendix ”of anyone.

Thus, she decided to enter a more technical niche; the world of intellectual property. After a successful performance she joined a local association where she became vice president. However, when she was ready to be promoted to the presidency, they closed the doors for her because “they were not ready for a woman to be president much less on such a specific field”

“They took me out of the local sphere but I started working internationally. I joined various associations and tried to make a name of myself”, she said.

Some time later, María Cecilia joined CorralRosales as a partner and also has had an extensive career as a mediator and judge / judicial assistant. She is one of the few professionals who holds a partnership in a national law firm. According to Romoleroux, this is due to the fact that “women do not give themselves the opportunity to go far. It is necessary to work from dawn to dusk, travel and possibly miss many family-related activities.”

“You have to combine the roles between mother and lawyer.”

“Many times society does not help professional woman reach high positions”, says Maria Cecilia; an issue that was ratified by the Ekos Group Research Unit who conducted a survey to find out the number of women who hold CEO and management positions. The result shows that only 37.3% of women have such positions in contrast to that of men 62.7%.

“This reality is not very far from the realm of law. In such sexist communities it is difficult to be a mother, wife and professional at the same time”, said the expert. That is why there are countries – like Italy – that have limited spaces for women to be partners or directors of consortia or legal groups. On the other hand, factors such as the Ecuadorian work environment causes men to have an advantage above women at time of selection or hiring for new positions.

In spite of all the social obstacles, last year María Cecilia was recognized as “Women Chambers in Law 2018 for Ecuador” in the annual awards ceremony for Chambers and Partners Legal Directory within the Diversity and Inclusion Awards category, where her career, achievements and especially her legacy were analyzed; that is, the projects she is taking on to leave a mark or a way forward in the country.

Finally, María Cecilia Romoleroux shared what her motivation to dedicate herself to this legal field was and her answer was a simple: “life gave me this”.

Education:

1990: Doctor of Jurisprudence at the Catholic University of Ecuador

1991: Paralegal program at Georgetown University, United States of America

1993: International Relations – Ship for the World Youth, Japan

1997: Master Lucentinus in Copyright at the University of Alicante

Experience:

2000-2014: Mediator of the Ecuadorian-American Chamber

2002-present: Partner in intellectual property and regulation, CorralRosales

1999-2000: Secretary of the Ecuadorian Association of Industrial Property Agents

2001-2003: Vice President of the Ecuadorian Association of Industrial Property Agents

2003-2019: International Intellectual Property mediator for International Trademark Association

2009-2012: Judicial Assistant of the Administrative Contentious Court

2012-present: Mediator and arbitrator for ASIPI

2017-2019: INTA board member

2019-2021: Member of the Programming Committee at the Association Internationale pour la Protection de la Propriété intellectualle

2019-2021: ASIPI President of the Committee of Counterfeiting

Achievements:

2017: President of the first Latin American INTA conference in Cartagena

2018: Winner of the Chambers “Lawyer of the Year” award

2019: Nominated International Program Leader for INTA Boston

2020: Chairman of the Host Committee for ASIPI Quito

If you want to read the interview in spanish, press here

Teleamazonas – Annual and/or monthly taxes apply from January 1st

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DETAILS

FECHA: 2-01-2020

CORRALROSALES IN THE NEWS:: 

-Andrea Moya

DATE: Teleamazonas

Our Partner, Andrea Moya, has been interviewed by the Teleamazonas news to explain the tax amendments introduced by the “Tax Simplification and Progressivity Law” and the date on which the amendments come into force.

“When taxes must be paid on an annual or monthly basis, the amendments entry into force from the first day of the following month. All amendments, in general, are effective as of January 1, with certain exceptions. The first exception is the distribution of dividends. This amendments entry into force on December 31,” Andrea Moya said in the interview.

Another of the points analyzed by our Partner was the amendment to the sub capitalization limit. “Previously, in credits between related parties you had a sub capitalization rule. Now this limit for interest expense changed to 20% of the profit. This should only affect contracts signed as of this date,” she explained. However, this has not been clarified in the law.

Another of the reforms that will come into force in 180 days, is the VAT for digital services, such as Uber or Netflix. “All the concepts that the law does not regulate specifically, the Tax Authority will have to issue a regulation” Andrea Moya points out during her interview.

All these changes could mean an amount of 600 million US dollars in revenue for the Government.

If you want to watch the video, press here

A Christmas Smile

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Last Saturday, December 21, some members of the CorralRosales team volunteered at a Christmas party at San Vicente de Paúl Children’s Home. This state institution, managed by the Daughters of Charity of St. Vincent de Paúl Company, is responsible for the care and protection of up to 300 children between zero and twelve years of age.

CorralRosales firmly believes in corporate social responsibility; that is why we are always willing to be part of any humanitarian event or activity.

On this occasion, we decided to share our time, which is the most valuable thing we have. The volunteers of the CorralRosales team spent a day sharing activities, playing games and listening to these little children who need so much attention and love.

65 boys and girls from newborns to adolescents attended the event. They were able to enjoy an afternoon full of fun with a clown, magic tricks and live music. Together the CorralRosales team and the children sang the traditional Christmas carols, played with friends, and ate hamburgers and cotton candy; small pleasures the children thanked with smiles that lit up their faces as well as ours. And as it is to be expected at a Christmas celebration, Santa, Mrs. Clause and their helpers handed out gifts that included toys and clothes.

Without a doubt, it was an unforgettable and very emotional experience, not only for the little ones but also for the entire CorralRosales volunteer team. Having the opportunity to share time with these children reminded us of how fortunate we are and that we can find happiness in small things such as a smile, a hug or a laugh in the company of our friends.

Happy Holidays from the CorralRosales Team!

Public-Private Partnerships in Ecuador

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DETAILS

DATE: 11-12-19

CORRALROSALES IN THE NEWS: 

-Jimmy Rodríguez

MEDIA: Gestión Digital

Ecuador is committed to accelerate the construction of infrastructure and the provision of public services through Public-Private Partnerships (“PPP”). For this purpose, it is essential to plan and prioritize strategic projects by sector; a transparent and predictable legal framework; and, above all, an inter-institutional structure with defined competencies and with the capacity to coordinate, monitor, and control.

The State and the private sector can be complementary agents in the provision of goods, jobs, and services to citizens. One of the fundamental responsibilities of the central and regional governments is to provide high-quality infrastructure and public services in a timely manner. By associating with the State, the private sector contributes with capital, as well as experience and specific knowledge. This figure is known as Public-Private Partnerships.

Chile, Colombia and Peru have had PPP regulations and experiences for at least a decade. In Ecuador, the Law of Incentives for Public Private Partnerships and Foreign Investments was enacted on December 18, 2015. So far, several APP contracts have been signed between the Central Government and private[1] partners. As part of the National Development Plan, The Ministry of Transport has 5 road projects in public tender and 9 other projects on the agenda[2]. On the other hand, although there are some initiatives promoted by the private sector, it is still a pending task of the regional governments to crystallize projects through this instrument.

The PPP scheme ensures the legal stability of the contract and grants access to tax benefits for the private partner, such as income tax 10 year´s exemption, tax outflow (ISD) exemption on imports, financing and payment of dividends, and the reduction of tariffs and VAT applicable to imports related to the project. The applicable law provides the possibility to submit any dispute that may arise between public entities and private partners to a national or international arbitration process.

The timely execution of the projects and the absence of conflicts derives from the capacity of the State to coordinate and monitor the execution of the projects, and cooperation between institutions. For this purpose, the State should have adequate material and human resources to ensure the success of the projects.

Given that the State has limited and scarce economic resources, it is decisive that Ecuador maintains the incentives contained in the Law of Incentives for Public-Private Associations and Foreign Investments, and that it applies a modern and transparent system of PPP which will contribute positively to the development of the country.

If you want to read this article in Spanish, click here

[1] The relevant infrastructure projects are: Posorja Port, Bolívar Port ; Río 7 – Huaquillas Highway; Guayaquil viaduct; and, Chongón – Santa Elena road system.

[2] Ver: https://www.obraspublicas.gob.ec/asociacion-publico-privada-2013-2017_esp/ (2019-11-22)

Solidarity Bike Race

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Last Sunday, the CorralRosales team participated in the Niños de María foundation solidarity bicycle race.

As it has already become a tradition, on November 24 the Niños de María foundation organized its eleventh cycling race. Under the name “Record Niños de María, pedaleando por la educación de 300 niños”, hundreds of participants gathered to raise funds to pay for food and education of 300 children.

The Niños de María foundation, created in 1994 as a non-profit Catholic foundation, welcomes the most vulnerable children in our society into their schools and programs such as: the sewing project “Hilando Futuro”, choir, symphonic orchestra or folkloric dance.

CorralRosales is very committed to social causes. Therefore, we wanted to support this great solidarity initiative taking part in it, since all the money raised from the race registration will be used to support the Niños de María foundation school and projects.

“We decided to participate in this event not only because it allows us to put in our grain of sand and contribute to a better society, but also because it helps us strengthen ties between coworkers in a healthy environment,” says Verónica Fernández, Director of Human Resources of the firm.

The CorralRosales team, who wore a specially designed shirt for the occasion and competed under the business category of the race, was made up of both partners and administrative staff of the firm, and their families. The race route was 21-kilometer long and took place in the Chaquiñán de Cumbayá.

After the race, the team met again and was able to share some of the experiences and anecdotes of the day. Despite the fatigue from the race, everyone agreed with the words of one of the Partners of the firm, Francisco Gallegos: “It has been a pleasure to be able to enjoy an activity with family along with coworkers. Without a doubt an incredible experience that we recommend and that, of course, we are looking forward to repeating”.

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Idealex – Technological Tools in the Workplace

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DETAILS

FECHA: 24-11-19

PROFESIONALES EN LA NOTICIA: 

-Edmundo Ramos
-Rafael Serrano

MEDIA: Idealex

Most companies provide their employees with technological tools (“ICTs”) such as corporate email, mobile phone, and computers in order for them to fulfill their tasks. It is common for the worker to use them for personal purposes, resulting in situations of unauthorized use of work ICTs, or the incorrect handling of information owned by the employer.

Since the employer is the owner of the ICTs, he may establish limits for the proper use of them. Article 46 of the Ecuadorian Labor Code does not establish any laws regarding the treatment of information and the consequent right of the employer to access and control it. Nevertheless, the employer must respect constitutional rights granted for the protection of data, correspondence and privacy. 

The right to inviolability and secrecy protects the communications made by the worker. For this reason, the employer will not be able to access email or information contained in the company’s computer or cell phone without the worker’s consent.

Communications can also be protected by the constitutional right to personal data protection: “The right to personal data protection, which includes access to and decision on information and data of this nature, as well as their corresponding protection. The collection, archiving, processing, distribution, or transferring of this data or information will require the authorization of the holder or the mandate of the law.”

Personal data is all the data or information that makes a person identifiable. In general, corporate emails refer to names, surnames, or positions of the person to whom the email is assigned, just as the cell phone number is linked to a specific person. The definition of personal data would include both the email and the cell phone number. Therefore, since this information can be considered as personal data, the authorization of the holder is required to access and review this information. 

Finally, the right to privacy also protects the use and access to ICTs. The American Convention on Human Rights recognizes this right, which provides the following: “No one can be subjected to arbitrary or abusive interference in his private life, his family, his home or his correspondence, nor of illegal attacks on his honor or reputation.”

The Inter-American Court of Human Rights has indicated, “… The scope of privacy is characterized by being exempted and immune from abusive or arbitrary invasions or attacks by third parties or the public authority.” The right to privacy would apply to personal communications made by the worker using work ICTs.

The rules that define the use and control of technological tools must be in writing in the different legal documents of each company, in order to have the necessary support to sanction their misuse:

Employment Contract: the employer must establish in the employment contract the delivery of technological tools and the use of them. The contract shall also recognize the rights of the employer to recover the ICTs and obtain a backup of the information contained therein.

Internal Work Regulations: It is essential to incorporate in this document, rules that regulate the use of technological tools. Employers may establish sanctions in their Internal Labor Regulations for their misuse or the inclusion of employee’s data and personal information. The internal regulation must establish the ownership of the information contained in these tools, as well as the periodicity for monitoring or supervision.

Internal Policy of the Company: these documents must explain the rights and obligations that the workers have regarding the ICTs. The policies shall establish the right of the employer to access and obtain copies of all the information within these technological tools. Workers must be notified and informed to the worker.  

Delivery / Receipt certificate: At the time the technological tools are delivered, the employer must establish the limitations and conditions under which the tools are delivered. It is important to detail the physical state and the data content of the tools so that, at the time of their return, the worker is responsible for any deterioration not attributable to their normal use.

Training: The employer shall conduct training for workers regarding the importance and limitations of the use of technological tools.

In conclusion, technological tools facilitate the execution of the functions performed by the workers, but their use must be regulated in detail so that both the employer and the worker know the limits and the sheer work-related purpose that must be given to them. The adequate protection of the company’s ICTs and information that they contain will be possible only if there is clarity in the rights and obligations regarding the use of such tools.

Edmundo Ramos’s Bio:

Edmundo Ramos is a partner at CorralRosales. He has more than twenty-five years of expertise representing local and international clients in labor and social security matters. Edmundo leads the CorralRosales Labor Department and participates actively in the area of ​​Dispute Resolution in the management of labor disputes.

Rafael Serrano’s Bio:

Rafael Serrano is an associate at CorralRosales. He has more than five years of expertise in the TMT industry. He leads the Data Protection Department with an emphasis on personal data protection, electronic commerce, and emerging technologies.

If you want to read this article in Spanish, click here

Should filing a claim and not the summon interrupt the statute of limitation?

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The amendment to the General Organic Code of Processes (COGEP), which entered into force on June 26, 2019, modified article 64(4) substantially modifying the interruption of the statute of limitations. Thus, before the reform, COGEP established that: “The effects of citations are… 4. Interruption the statute of limitations.” While after the amendment, it establishes that: “The effects of citations are… 4. Interruption of the statute limitations. If the lawsuit is summoned within six months of being filed, the interruption of the statute of limitations will be rolled back to the date in which the lawsuit was filed.”[1] Due to the amendment in reference, ¿is the right to legal certainty compromised?

Historically, the regulations governing civil procedures in Ecuador contemplated that the statute of limitations was interrupted only through citation. Since the first Civil Code enacted in 1869, until the last amendment to the COGEP entered into force, the citation of the lawsuit had been a concrete and verifiable date, that interrupted the statute of limitations. With the amendment, the interruption is rolled back to the date the lawsuit was filed, which is an unknown fact until the citation is made-, solely if the citation occurs within 6 months after the filing of the lawsuit. Keep in mind that the citation of the lawsuit is a fundamental factor, since only once it is achieved the litigation between the parties in conflict is locked and any legal terms begin to apply.

The Civil Code defines the statute of limitations as a way of acquiring goods or extinguishing rights for not having exercising those rights within the period determined by law[2]. Thus, a legal proceeding may be initiated within the time frame established in the law. If there were no statute of limitations, the right to legal certainty would be violated. It is the responsibility of citizens to initiate proceedings in due time and form or, to plead statute of limitation when having been sued and summoned once the legal term is exceeded.

Legal certainty implies, among other things, that the parties shall know the applicable rules when a process starts. The Constitutional Court has determined that “…the right to legal certainty is understood as the certainty in the application of the law that derives from the obligation of public authorities to respect the Constitution as a supreme law, and the rest of the legal system.” This right to know with certainty the enforcement of the existing norms in the legal system is violated the amendment since, rolling back the date for interrupting the statute of limitation to the moment the lawsuit was filed exclusively if the citation took place within six months, causes the defendant uncertainty.

For example, before the amendment, in a moral damage proceeding, were the statute of limitations ends 4 years after the perpetration of the act, the law allowed the defendant to know the legal framework for his defense. That is, the plaintiff was certain of the time frame stated in the law to exercise his right and initiate a proceeding. The amendment to the COGEP allows the interruption of the statute of limitation to take place not on the date the lawsuit is summoned, but on the date on which it was filed, undermining the defendant´s right to legal certainty.

To a greater extent, in the previous example, before the amendment, if the plaintiff filed a lawsuit for moral damage on the last day, that is, 3 years and 365 days, the statute of limitation would have ended. While with the amendment, if the lawsuit is filed on that same day, the statute of limitation would not have ended as long as the defendant is summoned within the following 6 months. That is to say, in the proceeding for moral damage, the plaintiff would have 4 years and six months for the lawsuit to be summoned and still rightfully exercise the respective proceeding, while before the amendment there were exactly 4 years to summon the defendant.

With the amendment of the article 64(4) of the COGEP, the legislator has allowed the lawsuit citation to interrupt the statute of limitation of the proceeding as long as the defendant is summoned within the following 6 months after the lawsuit is filed, which, in our criterion violates the constitutional right of the defendants for legal certainty.

Mateo Zavala
Associate at CorralRosales
mzavala@corralrosales.com

[1] COGEP, art. 64: “Art. 64.- Effects. The effects of the citation are: […]
4.” Interrupt the statute of limitations. If the lawsuit is summoned within six months of filing, the interruption of the statute of limitations will be rolled back to the date when the lawsuit was filed.”
[2] Art. 2392.- Statute of limitations is a way of acquiring things of others, or of extinguishing the actions and rights of others, for having possessed the things, or not having exercised said actions and rights, for a certain time, and concurring with the other legal requirements.
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